Soft US August CPI report eases concerns over September taper

The annual rate of US inflation as measured by changes in the consumer price index (CPI) halved from nearly 3% in the period from July 2018 to February 2019. It then fluctuated in a range from 1.5% to 2.0% through 2019 before rising above 2.0% in the final months of that year. Substantially lower rates were reported from March 2020 to May 2020 and they remained below 2% until March of this year.

The latest CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices increased by 0.3% on average in August. The result was less than the 0.4% consensus expectation and July’s 0.5% rise. On a 12-month basis, the inflation rate slipped from July’s seasonally adjusted reading of 5.3% to 5.2%.

“Headline” inflation is known to be volatile and so references are often made to “core” inflation for analytical purposes. Core inflation, a measure of inflation which strips out the more variable food and energy components of the index, increased by a modest 0.1% on a seasonally-adjusted basis for the month. The result was less than the expected figure of 0.3% and July’s 0.3% increase. The annual growth rate slowed from 4.2% to 4.0%.

NAB currency strategist Rodrigo Catril said the report “eases concerns over an imminent acceleration in prices and should nullify any lingering pressure on the Fed to taper in September…” However, he also thinks “a taper this year still looks like a good bet with November or December now looking more likely.”

Long-term US Treasury bond yields fell on the day. By the close of business, the 10-year yield had shed 4bps to 1.28% and the 30-year yield had lost 5bps to 1.86%. The 2-year yield finished unchanged at 0.21%.

In terms of US Fed policy, expectations of any change in the federal funds range over the next 12 months remained fairly soft. September 2022 futures contracts implied an effective federal funds rate of 0.13%, 5bps above the spot rate.

Catril noted used-car prices had been a large influence on higher CPI figures in the March quarter “and expectations for further declines over coming months as fleet demand eases suggest we shouldn’t expect a near term rebound in core inflation.” At the same time, “there are still many factors suggesting inflation is unlikely to ease significantly; inflation remains strong for food, housing and other goods.”

The largest influence on headline results is often the change in fuel prices. In August, “Energy commodities”, the segment which contains vehicle fuels, increased by 2.7%, adding 0.11 percentage points. “Commodities less food and energy commodities” was the second largest influence on the overall rise, adding 0.06 percentage points despite a 1.5% fall in used-vehicle prices.

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